PREPARATION OF CLOSING ENTRIES James and Susan Morley recently converted a large turn-of-the-century house into a hotel and incorporated the business as Saginaw Enterprises. Their accountant is inexperienced and has made the following closing entries at the end of Saginaw’s first year of operations:

Income Summary 210,000 Service Revenue 177,000 Accumulated Depreciation 33,000 Depreciation Expense 33,000 Income Taxes Expense 8,200 Utilities Expense 12,700 Wages Expense 66,000 Supplies Expense 31,000 Accounts Payable 4,500 Income Summary 155,400 Income Summary 54,600 Retained Earnings 54,600 Dividends 3,200 Income Summary 3,200 Required:

. Indicate what is wrong with the closing entries above.

. Prepare the correct closing entries. Assume that all necessary accounts are presented above and that the amounts given are correct.

. Explain why closing entries are necessary.

Exercise